There is a long and rich history of successful family businesses in Australia, estimated to be worth $1.2 trillion to the national economy. But many aren’t making adequate legal provisions to ensure their business survives into the next generation. Implementing a succession plan is crucial to ensure the transition into the next generation.
Unfortunately only 30 percent of family businesses survive into the second generation and 13 percent survive into the third.
Only 25 percent of business owners report that they seek external advice in the succession process, which approximates the percentage that survive into the second generation!
Planning for succession is essential to secure the future of the business and to preserve and enhance its value. The statistical odds on long-term success of family businesses are bleak in a competitive market environment unless suitable arrangements are put in place for the next generation and beyond.
The present economic environment and adverse trading conditions not only increase the risk of business survival, but also reduce the options for viable exits. Public floats are now virtually non-existent, capital raising and private equity are difficult to come by, there are less buyers and earnings multiples have declined. Reducing sale prices and deferred payment and earn outs are the norm.
This also means the death or incapacity of a founder can have an even more adverse effect on a family business where arrangements are not in place to assist the orderly transition to the next genera Divorce is recognised as one of the greatest destroyers of wealth in Australia. It poses a particular risk for families in business together who may face the break-up of their business along with the marriage of a family member.
It is possible to put in place effective structures to protect the family business against successful claims by a spouse in the event of a matrimonial breakdown. Until the abolition of death and estate duties in the early 1980s—and before Capital Gains Tax—effective planning usually involved the family elders relinquishing ownership or control over assets to take them out of the tax net on death. Often as a result they became dependent on their children, who sometimes were not as grateful for the assets and duty savings as their parents expected them to be! Similarly, there are those who invested in packaged income tax planning schemes over which they had little control, who thereby managed to turn manufactured tax losses into real losses.
Any business structuring should be undertaken for sound business reasons after careful planning and not just to avoid tax and certainly not to deprive a spouse of a fair divorce settlement. Subject to that caveat, proper structuring can ensure individual family members only have access through trusts to their share of agreed income and equity of the family business in order to limit any attempt by a spouse on divorce to access assets of the business on the basis it is property of the marriage.
Whether you choose to sell or transition the business to the next generation through succession arrangements, you need to plan that transition or exit many years in advance to ensure a successful outcome.
There are a myriad of important issues to consider in any family succession plan which include, understanding the family dynamics, identifying goals and objectives, future control and decision-making, protecting the founders during their lifetimes, tax-effective planning to minimise GST, income tax and stamp duty, and professional management of the business.
The good news is that many options exist and can be incorporated into an effective succession plan. Being ready for implementation at the appropriate time could include protecting the business from financial or matrimonial difficulties of family members, providing for the founders and their spouses into retirement, selling the business or group entities as a going concern to an external party, management buy-out, selling or merging the business with a competitor, dividing the business or assets amongst the family, a public float, closing the doors and selling the business assets, transferring the business on to the next generation by way of sale or gift, or introducing private equity.
If you are thinking of a possible future exit, consideration needs to be given to:
– Potential acquirers
– What preparation is required
– How to maximise sale proceeds/investment realisation
– Key contracts which may restrict change of ownership
– Asset ownership structures
– Superannuation and will considerations
– Valuation issues
– Pre-emptive rights and drag along and tag along rights.
The exercise in business succession planning is a strategic—and at the same time emotional—event for a family. It requires great skill and experience to advise on the most appropriate plan. You have a vision for your business to take it forward, and to assist you to achieve that vision it is important to work with people who understand and share your business outlook. You will need advisors with legal, accounting, valuation and tax experience to develop and implement an effective plan that will survive death and divorce and stand the test of time.
— Murray Landis is a Partner at Middletons (www.middletons.com.au), a full service, commercial law firm.
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